Iran: Battle Looms On Reforms

Recent visits by EU leaders to Iran have emphasized both sides' desire to increase their economic relations. In the third part of a three-part series on Iran and foreign investment, RFE/RL correspondent Charles Recknagel looks at the political battle within Iran over how open its economy should be.

Prague, 23 March 2000 (RFE/RL) -- The Iranian government has moved decisively in recent months to build its ties with Europe -- including landmark visits by President Mohammad Khatami to Italy and France.

But while European leaders have responded enthusiastically, it remains uncertain how quickly the diplomacy can translate into significant new foreign investment in Iran.

The reason is that many investors condition their willingness to do business in Iran upon Tehran's first carrying out major reforms of its economy, to reduce investors' level of risk. But these reforms are in turn tied to a highly divisive -- and far from resolved debate -- within Iran itself over whether and how its economy should be reformed.

Foreign investors say they would like to see Iran carry out a major privatization of its largely state-controlled economy as one of the first steps to creating a business environment they could comfortably enter. They would also like to see Iran reduce its high level of inflation, which many independent experts put as high as 30 percent, and get rid of its multi-tiered exchange rate.

Raquel Ajona is a regional expert at Deutsche Bank's research department in Frankfurt, Germany. She sums up the foreign investors' wish-list in part as follows:

"Creditors or investors would like to see some reforms. They would like to see more privatization, they would like to see Iran put certain limits to the high inflation they have, which is caused by the fact that they have had high deficits which have been financed by the Central Bank without any type of restrictions. And one of the main causes of the inflation has been the multi-tiered exchange rate."

She says foreign investors are interested in privatization because they think it will bring more responsible managers into Iran's economy -- people with whom they can do business efficiently. And she says investors would like to see far greater transparency in how state offices gather statistics, so that they could have greater faith in the government's economic data. Ajona says:

"One thing that the country could do to help investors is to have more transparency in releasing microeconomic data. In recent months, we have seen they are moving slowly, but I think people need more access to this information. They need to see how [Iran] manages its external debt, what type of repayments they are going to be doing, and all the [variables] in terms of preparation of the budget."

These issues are part of a debate already raging in Iran itself over what kind of economy Iran should have. Economic conservatives want more of the state control of almost every sector that now forms the basis of the Islamic Republic's economy, but reformists are arguing equally forcefully for more market liberalization.

The domestic battle over reforming Iran's economy is set to be every bit as bruising and difficult as the political battle now raging over social issues. Analysts say it will be complicated by the fact that the lines defining the reformist and conservative camps in the political debate do not define who is a reformist or a conservative in the economic battle.

Simon Williams, a regional expert at the Economist Intelligence Unit in London, says that means that even though political reformists have taken a majority in the parliament through last month's elections, economic reformers may be no closer to reaching their goal.

"Many of the president's force which has been elected will back him when it comes to political liberalization, but when it comes to introducing economic reforms that possibly will jeopardize the living standards of ordinary Iranians -- that threaten jobs, that threaten price rises, and even the ones that threaten ceding control over strategic areas of the economy to foreign investors -- they will be as reticent as their predecessors [in the outgoing conservative-dominated legislature]. Economic policy is going to prove to be a very contentious area for political discussion, there is no consensus on it."

Katerina Delacoura, a regional expert at the London School of Economics, agrees. She says that when it comes to economic reform, the political center wants to decentralize the economy or at least sees a need for doing so. But the political right and left do not want liberalization. Delacoura says:

"It seems that the pragmatists of the center, seem to be the only people who have accepted in some degree that changes in the economy need to take place. And as for the conservative right, and the reformist, liberal left, they both seem to have an unwillingness to make necessary changes in terms of the economy. The conservatives for the obvious reason that they are the direct bearers of the legacy of the revolution and the reformists because they also include in their ideology some soft, social justice issues or elements which are quite populist."

The government's third five-year economic development plan is due to begin with the new fiscal year this month. It has set out a series of ambitious goals for economic reform, privatization and growth, and reportedly seeks large amounts in foreign loans and credits between 2000 and 2005.

But if past experience is any guide, these goals will be difficult to reach. Structural reform would require the government to challenge the position of the bonyads -- the powerful charitable conglomerates which directly or indirectly control much of the non-oil economy. The bonyads are para-statal organizations that are tax-free and effectively free of accountability.

At the same time, many conservative Iranians are reluctant to open the economy to foreign money. The outgoing conservative-led parliament rejected a government proposal to let it borrow up to $47 billion in foreign currency to meet the needs of its development plan. Instead, the parliament imposed a net borrowing limit of a bit more than half that amount, hoping the government could make up any shortfalls through Iran's own oil revenues instead.

The new reform-led parliament, due to take its seats in May, will face similar economic questions.